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January 11, 2006

Hostel Provides Support For Lions Gate Entertainment Share Price and Earnings

The last time I posted on Lions Gate Entertainment (LGF) was following their presentation at the UBS Media Conference. At the time, I wrote:

I was dissatisfied with the explanation that Lions Gate Entertainment (LGF) provided at its presentation for the latest quarterly shortfall. I can accept the argument that free cash flow is the more relevant metric, but the unusually large discrepancy between EBITDA and FCF doesn't make sense to me based on what I know now. A look at the December quarter balance sheet figures for film investment and amortization might help. I believe that 2006 FCF numbers (ending March 2007) have no margin for error. I am still long my small position as I believe the stock is getting a little too depressed in the short term, with movies coming up in January and February that should do OK and rebuild confidence.

Well, it looks like I'll get bailed out my losing long position in (LGF). This past weekend, one of movies I was counting on, Hostel, was the #1 movie at the box office grossing $20 million. This was even better than I expected, but most importantly, following the sharp cut in guidance following the In The Mix flop it was critical that Hostel perform well or guidance for the balance of FY06 ending June and estimates of free cash flow for FY06 and FY07 would have been in jeopardy of sharp reductions....

Hostel should have decent legs and head toward $50 million in domestic box office. The next big movie in LGF's slate is Tyler Perry's Madea's Family Reunion, the sequel to Diary of a Mad Black Woman. Diary opened at #1 and grossed $50.6 million following its release on the last weekend of February 2005. I think Madea will match the success of the original. It opens on the same weekend this year and will again appeal to Tyler Perry's large African-American audience and benefit from much greater awareness among white audiences due to the success of the first film in theatres and on DVD.

These two films, along with the Saw II DVD and the expected good performance in LGF's TV business, should produce strong financial results for LGF in the first half of calendar 2006. My primary concern at LGF following the guidance reduction was that the free cash flow guidance of over $100 million in FY06 and FY07 was at huge risk if either the combined box office of Hostel and Madea fell short. Remember that LGF's guidance calls for FCF of over $100 million this fiscal year against EBITDA of only $35 million. With that risk in the rearview mirror for the next few months, I think LGF shares can approach their post Saw II peak in the mid-$10 area. To get past that will require realization of takeover rumors which remain strong and plausible. I plan to hold the remaining positions in Northlake cient accounts and reevaluate if the stock crosses $10 but I don't plan on buying more.

Posted by Steve Birenberg at January 11, 2006 09:01 AM in LGF